IRS relief for IRA owners entering into broker indemnification agreements

IRS relief for IRA owners entering into broker indemnification agreements

The IRS is providing temporary relief for owners of individual retirement accounts (IRAs) who have entered into indemnification agreements with brokers that may result in prohibited loan transactions.  The relief is in response to a recent decision by the U.S. Department of Labor (DOL).

DOL opinion

In October 2011, the DOL issued an advisory opinion addressing a scenario where an individual IRA owner entered into an agreement to indemnify a broker against the indebtedness of, or arising from, the individual's IRA with the broker. The advisory opinion asked under what circumstances such an agreement would be an impermissible "extension of credit," under Code Sec. 4975(c)(1)(B) and whether, in such cases, any prohibited transaction would be covered by DOL class exemption PTE 80-26. The advisory opinion concluded that PTE 80-26 does not provide relief for such extensions of credit

In general, Code Sec. 4975(c)(1)(B) prohibits the direct or indirect lending of money or other extension of credit between a plan and a disqualified person. For purposes of the Tax Code, a plan includes an IRA and a disqualified person includes a fiduciary. Also, an IRA owner who self-directs investments attributable to his or her IRA is a fiduciary and subject to Code Sec. 4975.

IRS relief

Pending further action or guidance from the DOL, the IRS announced that it will determine the tax consequences relating to an IRA without taking into account the consequences that might otherwise result from a prohibited transaction under § 4975 resulting from entering into any indemnification agreement or any cross-collateralization agreement similar to those described in DOL Advisory Opinions 2009-03A and 2011-09A. (That is, provided there has been no execution or other enforcement pursuant to the agreement against the assets of an IRA account owned by an individual granting the security interest.)

Ann. 2011-81

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